Because Raiffeisen wished to create credit among small agriculturists out of the immaterial asset of mutual knowledge, he limited the size of each society to a single village. For his purpose he was right, but his partisans are not right when they look askance at the larger areas of the town bank, where the nature of the members' business and the society's control is different.
All profits remain the collective property of the society, to be used for the society's good. They are divided into two classes of reserve fund—(1) reserve fund proper; (2) foundation fund. The former is regulated in the same way as in town banks. The second corresponds to the shareholders' dividend. It is undesirable to have nothing beyond an ordinary reserve fund, because money thus placed can only be withdrawn to cover losses: while if placed in the foundation fund it can be used for positive improvements, such as the extension of premises or the establishment of a burial fund. In actual figures, the reserve funds are not so strong as in the town bank, owing in part to the lower loan charges.
The loan capital, as in the town banks, is made up of small savings and deposits. It is drawn, either from within the area covered by the bank, in which case it comes both from members and non-members, the former being where possible rewarded at slightly higher rates in order to encourage membership; or from without the area, in which case it of necessity comes from non-members. Savings are received in sums from one mark upwards: the smaller amounts being collected by penny stamp books, similar to those used in the Post Office Savings banks of England. The willingness with which the peasants bring their savings to the bank is a triumphant proof of Raiffeisen's contention that the small agriculturists by a combination of unlimited liability and close supervision can become absolutely credit-worthy. No savings since the foundation of the first village bank have ever been lost through bankruptcy.
In addition the bank obtains credit from a central bank with which it has a current account.
The funds thus raised are utilised for three kinds of credit—(1) Simple loans; (2) current accounts; (3) property transfers.
Current accounts are rare except in villages where there is a little industry. With regard to the simple loan, the security, as in town banks, is personal pledge, land mortgage, or (very rarely) deposit of collateral. The personal pledge, as with Schulze-Delitzsch, is the most frequent. But Raiffeisen interpreted it more strictly than Schulze-Delitzsch. Not only must the credit-seeker produce an outside testimony to his character: he must also convince his society that he really merits this testimony. The member of the Schulze-Delitzsch bank is accepted on the strength of his general business reputation, added to his security, personal or material. The member of the Raiffeisen bank, though he have the best of pledges, is rejected unless he is known in his private life to be virtuous and industrious. The man of doubtful sobriety has no chance of obtaining anything from a country bank.
If it happen that an applicant is little known or new in the district, so that no one will go pledge for him, then the society, provided it is convinced of his good character, will grant a loan against land mortgage. This is not to be confused with the real credit granted by a land bank, where the value of the estate alone is considered. It is personal credit with a material caution, and it is not a long-term loan.
Furthermore, the society requires to know not only the character of the borrower, but also the specific object for which his loan is destined. It must be satisfied not only that the borrower wishes to employ the loan in his business, but also that the operation proposed is likely to turn out successful.
Property transfers are not strictly credit business. They are in the nature of investments for superfluous money, just as a town bank might invest in railway shares, with the difference that the investment is local and designed to meet indirectly the credit wants of members. The nature of the operation is as follows: A dies, leaving his estate to his heirs; and these, perhaps because they wish to leave the neighbourhood or because they want ready money for other reasons, put up the estate for sale in allotments. Or perhaps A during his lifetime wishes to get rid of a part of his estate. X, Y, Z, neighbouring peasants, are buyers, but they can pay only gradually—which they are allowed to do by law. The credit bank steps in as intermediary. It pays to the heirs of A or to A himself, as the case may be, the price of the estate minus a small commission. X, Y, Z become the debtors of the credit society, paying off their debt by regular instalments, which include principal and interest. The bank cuts out small traffickers in land, usually Jews, to the benefit of sellers and buyers. It benefits the sellers by charging them a moderate instead of an extravagant commission: the buyers by saving them from permanent relationship with land dealers who seek their ruin. The bank insists on regular payment of the instalments, because it wants its money back, while the dealer is constantly tempting the buyers to fall into arrears in order that he may eventually acquire the land himself.
There is a second form of property transfer, where the bank not only acts as intermediary but itself holds the estate for a time. Some land dealer, having obtained a mortgage on the estate of A, demands payment. A cannot pay and is forced to sell his estate by public auction. The dealer forces the sale, just when the estate market is likely to be most unfavourable, hoping to buy the estate for himself at an absurdly low rate. Thereupon the bank steps in; it bids against the dealer, and if he does not offer a good price, buys the estate itself and resells it later in the year, when the market is more favourable. In this way A can pay off his debts at once. Moreover, the bank does not keep the difference between the price of purchase and final resale. After the deduction of a moderate commission, it is handed over to A, who thus obtains a further sum with which he can make a fresh start.